Dominique Strauss-Kahn, the French economist who heads the International Monetary Fund, is under investigation for allegedly abusing his position by engaging in a sexual relationship with a senior official.

The inquiry, confirmed by an IMF spokesman, threatens to distract the organisation at a time when it is trying to focus its efforts on helping countries to withstand the global financial crisis.

Yesterday US President George Bush held talks with European leaders amid growing evidence that the world is sliding towards recession.

French officials and politicians reacted angrily to the Strauss-Kahn story, which appeared in the Wall Street Journal, accusing the US administration of 'playing dirty' by 'at the very least' pointing reporters to the IMF internal inquiry.

According to the newspaper, Strauss-Kahn had an affair with Piroska Nagy, a senior official in the fund's Africa department who was brought up in Hungary. The affair reportedly ended after her husband, Mario Blejer, a prominent economist and former president of Argentina's central bank, discovered incriminating emails.

Nagy then left the IMF and part of the inquiry centres on the possibility that she may have received an excessive payout for a person of her position.

Masood Ahmed, the IMF's chief spokesman, said: 'There was an allegation concerning improper behaviour of a personal nature on the part of the managing director. All allegations, particularly relating to senior management, need to be investigated.' But the handling of the investigation has drawn criticism from the IMF because not all board members were informed about it before the newspaper made its inquiries.

There was also anger in Europe. 'It's very odd that it comes just at the moment when people are talking about the IMF and its head taking a lead role in creating a new global financial order which will not necessarily be to the advantage of wealthy, right-wing Americans,' one French economist and government adviser told The Observer

Strauss-Kahn, a former finance minister, is a leading member of the French Socialist party and is known for his moderate left-wing views. In a statement on Friday he said the 'incident which occurred in [his] private life' took place in January 2008 and that 'at no time did [he] abuse [his] position as the fund's managing director'.

This is the second time that a major international financial institution has been hit by scandal in recent years. In June last year the then World Bank president Paul Wolfowitz, one of Bush's closest allies, stepped down following a scandal over a promotion and pay rise for his long-term companion who worked at the institution.

At yesterday's meeting with Bush, French President Nicolas Sarkozy and European Commission president José Manuel Barroso hoped to pave the way for an unprecedented summit this autumn to overhaul the global financial regulatory system. In France, as elsewhere in continental Europe, there have been strident calls for a fundamental reform of 'liberal laissez-faire capitalism' in recent days.

Sarkozy has attacked tax havens, hedge and sovereign wealth funds and big pay bonuses for risk-taking executives, as well as the American dominance of ratings agencies. However, Bush and many close aides are not convinced about the need for fundamental reform.

'Our European partners are taking bold steps. They show the world that we're determined to overcome this challenge together. And they have the full support of the United States,' Bush said during a speech at the US Chamber of Commerce last week.

However, the President, who leaves office in January, did not specifically mention calls by European leaders to reform the Bretton Woods financial system under which the world has operated since 1944. White House spokeswoman Dana Perino said that the US focus was on the immediate crisis. 'I think the most important thing we can do is ... stop the bleeding before we move on to the next project,' she said.

Barroso and Sarkozy met Canadian Prime Minister Stephen Harper on Friday and agreed on the need for an international summit to forge a new vision for the world economy before the end of the year. Gordon Brown has already said he would back such a plan.